Earnings Preview: CF Industries

CF Industries Holdings Inc. (CF) is slated to release its fourth quarter 2010 results on Friday, February 18 before the market opens. The current Zacks Consensus Estimate for the fourth quarter is $2.59, representing a significant annualized growth of 80.07%.

However, with respect to earnings surprise, over the trailing four quarters, CF Industries had a mixed performance. It outperformed the Zacks Consensus Estimate in two quarters while it under performed in the other two. The average earnings surprise was a negative 5.29%, implying that the company has underperformed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Third-Quarter Performance

On November 5, CF Industries reported its third quarter fiscal 2010 results. Net earnings were $48.2 million or $0.67 per share compared with $38.5 million or $0.78 per share during the same quarter last year.

Reported figures included a non-cash mark-to-market loss of $25.7 million on natural gas derivatives, business combination and integration costs of $22.8 million and $0.8 million of Peru project development costs.

Excluding the special items, the company’s adjusted net earnings for the quarter were $97.5 million or $1.10 per share. This was lower than the Zacks Consensus Estimate of $1.41.

Net sales shot up 113% to $917.1 million from $430.1 million in the year-ago quarter. The marked increase in sales was attributed to $400 million of sales obtained from Terra Industries and higher product prices, particularly for phosphates. However, CF Industries missed the Zacks Consensus Estimate of $982 million for the quarter.

Total sales volume in the quarter nearly doubled to 3.4 million tons from 1.7 million tons in the prior year as it largely benefited from the 1.6 million tons of Terra sales. Gross margin was $169.8 million versus $124 million during the third quarter of 2009.

Agreement of Estimate Revisions

In the last 30 days, out of the 13 analysts covering the stock, 1 analyst increased its EPS estimates, while none decreased their EPS estimates for the fourth quarter of fiscal 2010.

In the last 30 days, out of the 6 analysts covering the stock, none revised their EPS estimates upwards or downwards for fiscal 2010. For fiscal 2011, out of the 15 analysts covering the stock, 3 analysts increased their EPS estimates while none decreased their estimates.

Magnitude of Estimate Revisions

Despite the positive revision, earnings estimates for the fourth quarter, in the last 30 days, remained flat at $2.59. However, for fiscal year 2010, the earnings estimate revision moved up to $7.40 from $7.26. However, for fiscal 2011, the earnings estimate revision went down from $12.54 to $12.49.

In April 2010, CF Industries acquired its long-chased rival Terra Industries for $4.7 billion. With this acquisition, CF has become the global leader in the nitrogen fertilizer industry with a wide geographical footprint and a total capacity of 6.3 million nutrient tons of nitrogen and 2.1 million nutrient tons of phosphate.The company is set to achieve significant cost synergies with the integration of the Terra business, which is expected to boost profitability.

Our Take

CF Industries has a leading market share in many key fertilizers. It is prepared for a reasonably good application season, due to attractive corn farming economics and the needed restocking by downstream fertilizer channels. However, CF Industries is susceptible to higher natural gas costs and faces intense competition.

According to the company, the overall business prospects are very favorable in 2011 for both of its operational segment. North American market is expected to show positive trend in terms of demand as well as product pricing led by early harvest and strong projected 2011 plantings. Moreover, global demand-supply position is forecasted to remain encouraging for all its products.

CF Industries is also intended to maintain its strong balance sheet and cash position with more loan repayments in the near future. The company targets net debt in the range of 1.0 to 1.5 times of EBITDA.

For 2010, the company expects capital expenditures in the range of $240 million to $260 million and a bit higher in 2011.

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